A Real Options Approach to Nuclear Waste Disposal in Sweden
This report is concerned with an investigation of how the real options approach can be useful for managerial decisions regarding the phase-out of nuclear power generation in Sweden. The problem of interest is the optimal time-schedule for phase-out activities, where the optimal time-schedule is defined in purely economical terms. The approach taken is actual construction and application of three real options models, which capture different aspects of managerial decisions. The first model concerns when investments in deep disposal facilities should optimally be made. Although the model is a rough simplification of reality, the result is clear. It is economically advantageous to postpone deep disposal forever. The second model focuses on how the uncertainty of future costs relates to managerial investment decisions. Construction of this model required some creativity, as the nuclear phase-out turns out to be quite a special project. The result from the second model is that there can be a value associated with deferral of investments due to the uncertainty of future costs, but the result is less clear-cut compared to the first model. In the third model, we extend an approach suggested by Loubergé, Villeneuve and Chesney (2001). The risk of a nuclear accident is introduced through this model and we develop its application to investigate the Swedish phase-out in particular, which implies that waste continuously disposed. In the third model, focus is shifted from investment timing to implementation timing. The results from the third model are merely qualitative, as it is considered beyond the scope of this work to quantitatively determine all relevant inputs. It is concluded that the phase-out of nuclear power generation in Sweden is not just another area of application for standard real options techniques. A main reason is that although there are a lot of uncertain issues regarding the phase-out, those uncertainties do not leave a lot of room for managerial flexibility if analyzed in compliance with the Swedish framework. Still, we argue that the real options approach can really be useful as a complement to other calculation techniques as indicated by our models. Hopefully, this work may inspire to future investigations of this interesting but highly unexplored area of application for real options.
Göteborg University. School of Business, Economics and Law